How to increase your appeal to lenders
As a new graduate or early career dentist considering practice ownership, it’s important to get the loan you need to build or purchase the practice you truly want. Receiving a favorable review from your lender can havean impact on the amount of funds that are available
to you, as well as the terms of the loan including interest rate and repayment timeline. There are two key steps you can take now to help increase your appeal to lenders — manage your credit score, and make smart lifestyle choices. Here’s how.
Managing your credit score
A healthy credit score forms the foundation for future borrowing, as it represents one measure of your creditworthiness and is one of the key factors your lender considers when reviewing your loan application. Credit scores are assigned by an independent credit bureau agency, with the most widely used scoring system provided by FICO (Fair Isaac Corporation). FICO examines a variety of credit data in your credit report to assign a score ranging from 300 to 850; higher FICO credit score numbers indicate that you are a more favorable credit risk, and lower numbers indicate you may be a less favorable credit risk.
Understanding what goes into your credit score can help you manage it better. For the general population, credit scores from FICO are typically made up of the following data, according to the MyFICO website:
35 percent—Payment history (timeliness of payments);
30 percent—Amounts owed;
15 percent—Length of credit history;
10 percent—New credit;
10 percent—Credit mix (different types of credit accounts).
Your history of timely payments combined with the total debt owed clearly have the greatest impact on your overall credit score. Let’s consider the importance of total debt owed.
Using all the credit that is available to you may be seen as an indication to your lender that you are not managing your debt well. For example, suppose you have two credit cards with credit lines of $10,000 each, for a total of $20,000 in available credit. Now suppose you have spent $15,000 of that credit limit. In this scenario, you have used 75 percent of available credit on your revolving accounts. This level of usage can typically be considered too high by lenders, which can ultimately lead to a lower FICO credit score.
Now, let’s say you pay down one card completely so that you owe $10,000 on one card, and $0 on the second card. You now have a much-improved credit rating, as your usage of total available credit is 50 percent. However, should you close the credit account that has a balance of $0, this may have a negative impact on your credit score as you are now using 100 percent of the $10,000 in available credit that remains on your single card. Reducing the usage to 25 percent on each card can also result in a higher score as well.
If you have made unfavorable credit decisions in the past, here are some suggested guidelines to follow to help rebuild your credit score.
• Maintain at least two or three revolving credit accounts (such as credit cards and lines of credit). This indicates to your lender that you are creditworthy and able to manage debt;
• Avoid applying for credit from too many lenders. Multiple credit inquiries made within a short timeframe may negatively impact your credit rating;
• Demonstrate that you know how to use your credit wisely by not using all the credit available
• Make on-time monthly payments for credit cards, mortgages, installment loans and student loans. Keep in mind that most service providers such as doctors’ offices, mobile phone services, health clubs, and others do report late payments and collections to credit bureaus.
If you are in dispute with a creditor, continue to make minimum monthly payments while you work toward a resolution.
Making smart lifestyle choices
Just as a low credit score can have an impact on the amount of financing available to you, your lifestyle choices before purchasing a practice can negatively affect your ability to acquire the type of practice you truly want. Imagine you have graduated from college and landed a solid associateship for $120,000 per year. As a single person just starting out, that’s a very nice income. So why not reward yourself for all your hard work in school with a brand new luxury car costing $1,200 per month? Here’s why not: you are purchasing an income-draining asset (your car) before you have purchased an income-producing asset (your practice).
When it comes time to apply for a practice acquisition or start-up loan, your lender will review not only your ability to sustain the debt incurred with your practice purchase or build out, but also all of the other debt obligations incurred for any reason. That’s because your business is considered the sole source of income to support every aspect of your life. So if you have increased your personal debt with an auto purchase, the funding available to you for a major purchase such as a practice acquisition may be limited by that existing debt. As a result, you may find you are buying a smaller practice, building in a less desirable location, or perhaps even working for someone else, as you may not qualify for adequate funds to support the practice and lifestyle you truly want.
It is critical to understand that your personal lifestyle choices today can impact your future career. Reckless spending and low credit scores may affect your ability to purchase a high quality professional practice by limiting the amount of funds for which you can qualify. Make a point to put your career first and determine the personal acquisitions you can afford as your practice grows.
By managing both your credit score and lifestyle choices well in advance of your practice purchase or build out, you will help increase your appeal to lenders and position yourself for the best possible financing. This alone is a significant step toward your future success.
This article, written by Gavin Shea, originally appeared in the Winter 2018 Dental Practice Success. Mr. Shea is the national director-healthcare for Wells Fargo Practice Finance. Wells Fargo Practice Finance helps dentists through the purchase process and is a business and financial resource throughout a doctor’s career. Often involved two years before dentists purchase a practice, Wells Fargo Practice Finance helps build strong foundations with products including mortgages and loans against future earnings. For more information on practice and commercial real estate financing, call 888.937.2321 or visit the website.